I have read and researched numerous companies and their business model in the last few years. And Games Workshop has been the most interesting business I have come across. Not because this company is the next big thing or a giant blue chip company that makes a lot of money. Because it is one of the most simplest and fun business I have come across.
It sells miniatures to develop armies/clans that live in the Warhammer world; colors to paint those miniatures; strategy board games in which you use your customized miniatures; comics, magazines, and books about the Warhammer world.
But wait, what is Warhammer?
As of 2024, Warhammer comprises of two worlds: Warhammer 40K (sci-fi) and Warhammer: Age of Sigmar (fantasy), both of which has very famous lore that users are entrenched in. These two are endless fantasy worlds that comprises of several clans, gods, demigods, etc. (like Lord of the Rings). And the company regularly releases different sets & rule-guides that moves the story forward in the game as well as in books, magazines & series.
Who is their target audience?
The management is extremely clear that they don’t cater to everyone in the world, and has a narrow but sticky base. An ideal first time buyer would be someone in school who loves to read about fantasy worlds, loves strategy games, loves collecting miniatures toys, loves painting, or everything combined. Once they are introduced to the Warhammer world, they tend to stick for years, if not forever, and continue buying incremental releases to add to their unique collection.
How does Games Workshop make money?
It makes most of the money by selling starter kits for new customers, high quality miniatures, wide range of colors & accessories to paint those miniatures, board games, and rule sets. Recently it has also started a subscription based portal where users get access to all their past & new rule-sets, magazines and books.
They also make money by licensing their IP to several digital game developers and movie & tv series makers. The company is very conservative about this and runs a very tight ship to protect their brand and not allow a licensee to tarnish their brand value or diverge from the story or rules of the Warhammer world.
What are the KPIs of this business?
– Share of voice.
– Interest ratio in the events ran in various partner schools and local game clubs.
– Number of incremental releases.
– Number of retail stores & partner stores.
– Number of licensee over the long run.
What is their moat? If any.
Barrier to Entry: To create a endless fantasy world like Warhammer, with enormous fan base, and then create successful products, and services around it requires years of work, luck, and a lot of capital. Even if a company has the ability to invest in this kind of undertaking, the probability of it becoming a successful venture is low. Therefore, there is a huge barrier for new companies to enter into this industry.
Buyer Power: A new customer, who is exploring what comic to pick, what miniature to buy, or which board game to play, has a lot of buying power because he/she can choose to not buy Games Workshop’s products if they are too expensive. But once the customer is in the world of Warhammer and addicted to it (many do, for life), the customer doesn’t have much leeway to negotiate. Overall, the existing buyers don’t enjoy much buying power.
Supplier Power: In terms of raw material to manufacture miniatures, paint, and board games, the company doesn’t depend on any big or unique supplier. However, when it comes to designing new products, releasing new story lines, and keeping the existing customers engaged, the company depends a lot on talented and passionate staff. Therefore, there is definitely some key personnel risk.
Competition: Even though there are just a few players in the market, like Warner Bros, Walt Disney, etc. many competitors of Games Workshop, has the financial ability to invest into earning a bigger share of mind among the target customers of Games Workshop. This makes it difficult for Games Workshop to lock in new customers.
Overall, Games Workshop enjoys a deep moat due to the sticky nature of its business, and therefore enjoys pricing power. This can be seen clearly in their unit economics, and overall margins (more on it below).
Financials
Games Workshop runs a very clean & conservative balance sheet. Given their extremely strong moat and simple product, it doesn’t require much resources or employees to produce their products and services. And therefore, it enjoys a very high Return on Invested capital (ROIC) of over 40% for the past several years, while having almost non-existent debt.
Most of its current revenue comes from selling starter kits, miniatures and magazines via their retail stores & trade-partners. As of 2023, they have 526 directly owned retail stores and 6500 trade partners.
Management
Capital Allocation:
Generally, with business operations that has high margins and low-capital requirements, management of many companies kill the business by taking too much action to use the capital by buying other businesses (acquisitions), over-hiring and over spending (a few companies in silicon valley that are not profitable own charter planes for management; can you believe it?).
However, this management seems to get it right. They realize that there isn’t much room to invest back the cash they generate into the company and the probability of getting other acquisitions right is really low. Therefore, they try to return any cash after keeping 3 months of working-capital and 6 months of expected tax payments aside as dividends. And the best part is that unlike other management who don’t like to cut dividends when they need cash to invest in this business, the management of games workshop doesn’t hesitate in doing so.
Communication:
Their annual reports as one of the best in the business. Unlike most in the public-markets, their reports are extremely simple to understand and transparent. (For anyone who is new to investing and has started reading annual reports, this is what an annual report should look like)
Overall the management seems to have conservative, long term and high quality approach towards capital allocation & business operations.
Valuation
As of 2024, the company is available for ~$3.2B ($125 dollars per share) at the P/E ratio ~23. And by using the following assumptions for the DCF model:
– 10% annual revenue growth that gradually slows down due to base-effect.
– 35% operating margin assuming increasing personnel & technology costs.
– ROE of 40% , compared to over 45% in the last decade
– 10% cost of capital
– 5% terminal rate of return at the end of 10 year period. I have used a higher terminal rate of return because with such deep moat because I believe it will enjoy a higher growth rate than market’s.
The intrinsic value of Games Workshop comes to around $3.5B. Therefore, the current price offers of margin-of-safety of just 10%. Currently, it seems to be fairly valued (more or less) as per the facts that we see right now. If the management is able to grow over our assumed growth rates, the intrinsic value of the company might expand, and my current analysis might look foolish.
Conclusion
This business seems to have it all. A proven track record, deep-wide moat due to its brand-value & stickiness, honest, and conservative management, and lean operations. Currently, the company seems to be doing all things well.
Disclaimer: This is obviously not investment advice (no equity report on this site is). This post is just to share my learnings and observations. If you want to get better at investing, you should do your own research.
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